Endeavour Silver And The El Cubo Story

| About: Endeavour Silver (EXK)

Endeavour Silver (NYSE:EXK) is a highly successful junior silver producer. EXK has managed to increase production eight years in a row, and all going well, it should be able to add another year to that tally in 2013. EXK has a market capitalisation of $790M, no debt, and $59M in working capital, in addition to a credit facility of $75M. The company produced silver at a cash cost of $5.08 per ounce in 2011, which is among the lowest in the sector. Besides a large portfolio of exploration properties, EXK operates three silver mines in Mexico, namely the Guanacevi Mine in the state of Durango (2012 production was 2.9Moz silver equivalent or Ag-Eq), the Bolanitos mine in the Guanajuato district (2012 production was 3.0Moz Ag-Eq) and the El Cubo mine, only a bit more than a stone's throw away from the Bolanitos mine (2012 production of 1.8Moz Ag-Eq).

The purchase of the El Cubo Mine from fellow Canadian precious metals miner Aurico Gold (AUQ) closed last year on July 13. AUQ received $100M in cash plus $100M in EXK shares in exchange for the El Cubo silver mine plus some exploration projects.

EXK used to truck the silver concentrate from the Bolanitos mine 1000km north to the Guanacevi mine for further processing. The newly purchased El Cubo mine came with a leach plant only 15km away, promising immediate savings. Furthermore, the combination of the two mines in close proximity to each other opened the possibility to refurbish an existing plant on their property.

At the beginning of October 2012, a number of non-union workers from the El Cubo mine initiated an illegal work stoppage which was resolved quickly, but had originated in problems with the previous owners of the El Cubo mine. This incident, along with other indicators, give reasonable ground to assume that in comparison to the two other EXK mines, El Cubo was in a rather dismal condition at the time of transfer of ownership. In any case, EXK has published a rather extensive list of improvements which they have identified and are in the process of implementing in order to turn around the El Cubo mine.

EXK state with regards to their growth philosophy that they endeavor to 'Acquire under-explored, under-performing mines and properties with existing infrastructure in historic silver districts'. EXK has already succeeded in doing just that with its first two operating mines and have clearly set out to work its magic on El Cubo. Initial reports already show this process well under way. The proof will be in the pudding, however, and Mr. Market will be keeping a watchful eye on the upcoming quarterly reports.

The deal with AUQ came back to bite the share price, however, when AUQ announced the sale of their $100M block of EXK shares to three investment firms in mid-October 2012. At least some portion of this block must have found their way into the retail market, putting noticeable downward pressure on the share price. Whether or not this selling has concluded is anyone's guess.

Looking at the EXK chart, it is obvious that the market has been hesitant to put money on the El Cubo turn-around. This lack of market enthusiasm combined with the sale of the ex-AUQ shares has resulted in a share price decline from $10.70 at the end of September to a current level of just under $8.0. There is strong technical support at $7.60.

An investment in EXK at the current time is clearly a bet on the management to turn El Cubo into a profitable mine and capitalize on the proximity of the Guanacevi mine. EXK management has done it before, and this gives reason to assume that they might just be able to do it again. The coming weeks might present an opportunity for investors wishing to place this bet with technical indicators starting to align. We will be giving updates and technical analyses on our instablog.

Disclosure: I am long EXK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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